Oracle-Sun versus commodity hardware

In a recent interview with Nikkei Electronics Asia, Acer CEO Gianfranco Lanci made the case that the company has seen dramatic success in the PC market because it abandoned direct sales.

Acer has a huge market presence in Europe and Russia and has focused on market share over profitability, with an operating profit of just 2-3 percent, according to analyst firm Gartner. Thus far it's worked; Acer's global PC market share hit 21 percent in Q3 2009, just 1 percent behind HP and a percent or two above Dell.

Shocked? Me too.

Because PCs are commodities, Lanci argues that brand recognition and exterior styling are the most important factors for consumers. And obviously the products have to work well enough for consumers to continue to buy them. In fact, Lanci has used a similar argument in the past to suggest that "U.S. computer brands may disappear over the next 20 years, just like what happened to U.S. television brands."

Whether or not Lanci is correct, most observers agree that PCs and servers have become commodities. To some extent it's surprising to see Acer's "good enough" hardware make such large gains. This may be because the markets that are buying Acer products have less PC history, and newer machines are dramatically better than the computers and servers of 10 years ago.

In complete contrast, Oracle, with its newly acquired Sun hardware business, announced last week that it would go in the opposite direction and start selling direct in order to gain back the profit margin lost to VARs.

As CNET's Stephen Shankland wrote, Oracle is now a hardware company and needs to offset the fact that it owns a number of commodity products, including not just Sun servers but also MySQL and other pieces of software. By eliminating the middleman channel, Oracle can bump up margins. But it's not clear that the market will be willing to pay a premium for Oracle-Sun products.

To date, Oracle has been able to manipulate pricing and software support contracts while Sun's hardware has languished under the pressure of Linux and commodity x86 servers. For that matter, Sun software has long been confusing and lacking much wow factor.

As of right now, I'll put my money on Oracle over Acer for long-term success. A business with 2-3 percent margins will hit seriously hard times if the margin shrinks any further.

Oracle, on the other hand, can take much of the expense out of Sun, and continue to maintain a ridiculously high 82 percent gross profit margin with plenty of room to spare should things take a downward turn. And if worse comes to worst, Oracle can always pull the ripcord on the Sun hardware and the direct sales model.